French Perfumers Worry About Leaking Secrets in China

France and China agreed on July 29 to work together to improve the regulatory framework for exporting European cosmetics to China. Relevant agreements were reached following a meeting between French Finance Minister Bruno Le Maire and Chinese Vice Premier He Lifen, according to the French Finance Ministry. A day later, on July 31, the French minister will meet with Chinese investors in Shenzhen. The Franco-Chinese working group will seek to establish cooperation in the field of intellectual property, including information on products and counterfeit goods, as well as work on standards and inspections.

In early June, the China National Institute of Food and Drug Administration successively introduced a series of new rules for importing cosmetic products from Europe. They oblige European cosmetics firms to provide detailed data, ranging from ingredients and details of production processes to sources of raw materials and the exact composition of formulas. Most of the information is collected and stored in the PRC government database. At the same time, as Bloomberg reported in June, citing sources, the EU authorities expressed concern about the new import rules. European cosmetics companies, including primarily France’s L’Oreal and LVMH, are concerned that they could be forced to disclose technological secrets, as they do not yet have sufficient evidence that the Chinese authorities will not “abuse” the information received. At the same time, the market leader L’Oreal, although did not disclose its income in China in 2022, noted in the reporting that the North Asia region was the second largest sales market after Europe, and sales in this direction amounted to about a quarter of the declared 38, 3 billion euros at the end of the year ($40.8 billion).

Forced Technology Transfer (FTT) is a widespread practice in China, says patent attorney Alina Akinshina, CEO of Online Patent. She recalls that the risks of FTT remain one of the most important subjects of trade wars between the US and China. One common implementation of FTT policy is to restrict market access if technology transfer requirements are not met. “In fact, a company wishing to enter the market must provide the necessary amount of information about its technologies and products, disclose the details of production processes – otherwise it simply will not get access to the market,” Akinshina explains.

According to her, it seems that similar requirements are expected to be introduced for the supply of cosmetics and perfumery products to China. “Given the history of the issue, the EU’s concerns about the possibility of losing trade secrets are justified. Similar concerns should be shown to all exporters of perfumes and cosmetics interested in the Chinese market, as the rules will be brought to uniformity,” said the CEO of Online Patent. She admits that if it is completely impossible for European companies to keep technological aspects secret, the form of legal protection may change, namely: individual technological solutions will also be patented.

There has always been an opportunity to copy the formula of a product released to the market, for this it is not necessary to have a composition and a technical map – it is enough to buy a product in a store and research it, Anna Zhuravskaya, managing director for commerce at Natura Siberica Group, noted in a conversation with Vedomosti. “Certain concern in connection with the introduction of new rules in China may be innovative components and products that have never been on sale before. These are risks for a company that has spent years of research and funds developing a unique formula, and now must submit full documentation to the Chinese regulatory authority. However, all over the world, companies have been using patents for a long time. Another issue is that they do not work effectively in all markets,” says Zhuravskaya. Nevertheless, the creation of a French-Chinese working group gives hope for an opportunity to discuss the details and nuances of the new law, smooth out possible rough edges and achieve greater guarantees for international manufacturers, says Natura Siberica Group’s managing director for commerce.

On the one hand, Europeans are understandable in their concern about Chinese standards for importing cosmetics – it really looks like legalized “industrial espionage,” says Sergey Lukonin, head of the Chinese economics and politics sector at IMEMO RAS. But in reality, the Chinese are already able to borrow technology without licenses, and what is happening now fits into the trend of streamlining the Chinese market in accordance with the status of one of the world’s largest importers of goods against the background of the fact that the main buyer of imported goods – the Chinese middle class – makes ever higher demands. “In part, this is similar to the experience of Japan, where in the 1970s and 1980s. there were tough barriers to the penetration of foreign companies into the market, which, however, still remain quite significant. The Chinese are following the Japanese path,” the expert states. This is also an element of “diplomatic” bargaining: the Chinese want to have some kind of agreement on equal or mutually recognized standards of goods, so that, in turn, it would be easier for them to penetrate the European market, says Lukonin.